Good day, and welcome to the Kilroy Royalty Corporation First Quarter 2021 Earnings Conference Call. I would now like to turn the conference over to Michelle Ngo, Chief Financial Officer. Please go ahead, ma'am.

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Paratte, and Eliott Trencher. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to the supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 8 days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC. And both are also available on our website. John will start the call with a review of the quarter and business conditions in our markets. I will discuss first quarter financial results and provide you with earnings guidance for the second quarter. Then, we'll be happy to take your questions. John?

Thank you, Michelle. Hello, everybody. Thank you for joining us today. We're pleased to see optimism beginning to take hold in the economy as economists are forecasting strength in corporate earnings, housing, and job growth, and global growth is rebounding more quickly than expected. These indicators all bode well for real estate. And we are increasingly positive on tenant demand. While we understand there will be headwinds ahead, it appears we have turned the corner. We've seen the frequency of property tours significantly increase across all our markets. In San Francisco, for example, brokers are reporting tour activity approaching pre-pandemic levels with Seattle, San Diego, and Los Angeles reporting similar increases. Further, new requirements are starting to appear more regularly with tenants looking to renew their leases, expand their workforce, and upgrade inferior work environments for modern buildings and superior space. In our portfolio, we signed more than 200,000 square feet of leases in the first quarter compared to 61,000 square feet last quarter, and we are beginning to see traction on 2100 Kettner in San Diego. High-quality, well-located assets in our markets continue to command strong valuations, in many cases with record pricing. With respect to life science, demand in the San Francisco Bay Area and San Diego is very robust. The combined trends of the flight to newer, higher quality properties and the acceleration of obsolescence of older buildings work in our favor. They validate our development strategy and our commitment to sustainability and wellness. We are increasingly hearing from companies that they are advancing return-to-office plans. Google, Amazon, Facebook, Microsoft, and Netflix are among the many technology and media companies that are moving their entry timelines forward. With that overview, let's take a closer look at 3 key objectives that underpin our past, present, and future success. First, we continue to focus on a disciplined and thoughtful approach to capital allocation. Looking back, we completed more than $12 billion in transactions over the past decade that have fundamentally reshaped our portfolio, diversified our market footprint, and produced one of the most valuable development pipelines in the country. Last month, the sale of the exchange was another milestone in these efforts. We acquired the land site for $95 million in 2014, invested an additional $490 million to develop the 750,000 square foot property, and leased it to Dropbox while under construction for a 15-year term in 2017. We completed the sale of the property late last month for $1.1 billion or $1,440 per square foot, nearly doubling our total investment. It was a record price for commercial real estate in San Francisco. We chose to sell the exchange because it monetized the full value of an asset with limited options for us to add incremental value. It also provided us with substantial capital for new investment. And I'd like to point out that the transaction also demonstrates the significant disconnect between public and private market valuations. The second objective is the strategic expansion of our life science portfolio, primarily focused, at least for the near-term, on entitled land that we already own. The forces currently driving growth in the life science market are substantial, but effective capital deployment into the sector at this point requires caution and discipline. We continue to see properties marketed and acquired for life science that we believe will not be successful. With the expertise we have built in this sector and the pipeline of land sites we have accumulated in several of the best sales markets, we believe we are well positioned for a new round of significant value creation. Later this quarter, we plan to commence construction on the second phase of our roughly 50-acre, 3 million square foot Kilroy Oyster Point life science campus in South San Francisco. Phase 2 will include 900,000 square feet of space across 3 buildings and will represent a projected total investment of $900 million. Approximately $150 million has already been invested in land and infrastructure. We believe we are ideally positioned with Phase 2 and are already in negotiations with several prospective tenants. In addition to KOP Phase 2, we are also planning 3 new life science projects in San Diego on properties we own. Santa Fe Summit on the 56 Corridor and 2 others in the UTC submarket. At Santa Fe Summit, we have full entitlements to build approximately 650,000 square feet of life science product. In the heart of UTC, we plan to develop a 60,000 square foot property at 9514 Towne Center Drive as well as redevelop 4690 Executive Drive, a nearby 50,000 square foot building when its existing lease expires in 2022. And like KOP Phase 2, we are in negotiations on all 3 properties in San Diego. In the aggregate, these 4 projects will add approximately 1.7 million square feet to our current life science portfolio. And in the longer term, phases 3, 4, and 5 at Kilroy Oyster Point will expand our life science portfolio by an additional 1.8 million square feet. Adding this all up, we have a future life science development pipeline fully entitled for close to 3.5 million square feet. When completed and fully leased, it would increase our revenues from life science and healthcare tenants from 14% to more than 30%, all else being equal. We will have assembled the best-in-class life science portfolio of approximately 5 million square feet with an average age of 3 years in the best locations. And the third objective is our commitment to building a portfolio at a company that leads in wellness and sustainability and meets the highest expectations for diversity, equity, and inclusion. As most of you know, this has been a passion of ours for some time. We are the industry leader in every measurable category of sustainable property and company operations, culminating last year in the achievement of carbon-neutral operations. We are making substantial progress in enhancing the health and wellness profiles of our stabilized portfolio, and we now have the most certified Fitwel projects underway of any non-government property owner. Across our company, we continue to prioritize a number of human capital management initiatives, including diversity in hiring, career development, and strong team building and mentoring. We are dedicated to these actions because they benefit our tenants, our communities, and importantly, our shareholders. They make our properties more attractive and more durable. They make our enterprise smarter, better managed, and a more rewarding place in which to work. I'm always proud to note the many accolades and awards we receive each year for our efforts in these areas. To wrap up, let me reiterate a few points: One, demand for quality space in our markets is increasing, both from a leasing perspective as well as an investment perspective, highlighting the embedded value across our portfolio; two, we have been successful with our capital allocation program, which focuses on assembling a young, modern, well, and sustainable portfolio located in strong growth markets; and lastly, we are well positioned to monetize entitled life science sites that we already own through our development program. This provides us with a clear advantage to develop best-in-class products with superior returns. That completes my remarks. Now I'll turn the call over to Michelle. Michelle?

Thank you, John. FFO was $0.98 per share in the first quarter and included $0.01 of COVID-19 charge, which was half driven by residential and half driven by office tenant credit assessments. These charges are clearly trending in the right direction from the last few quarters. FFO per share in the quarter reflected continued growth and the contribution from our current development pipeline. Netflix on Vine contributed a full quarter of earnings, and we recognized revenue on our 9455 Towne Center Drive project in early January. These benefits were partially offset by the expiration of the 136,000 square foot lease in Long Beach in the fourth quarter. In our same-store results, first-quarter cash NOI was down 2.9%. Adjusted for $4.7 million of lease termination payments in the first quarter of 2020, cash same-store NOI growth would have been positive 0.7%. GAAP same-store NOI was down 1.4%, reflecting lower occupancy and lower parking income. During the quarter, we signed more than 200,000 square feet of leases, of which two-thirds were renewals and one-third were new leases. Cash rent spreads were positive 4.9% and GAAP rent spreads were positive 15.4%. Rent spreads were largely driven by 3 renewal leases, which had an average term of 2 years and are located in our second-tier markets, generally within projects currently undergoing renovation. At the end of the first quarter, our stabilized portfolio was 91.5% occupied, which was up 30 basis points from the prior quarter and 93.3% leased, which was down 100 basis points from last quarter, driven by the sale of the exchange and small expirations across the portfolio. Overall rent collection in the first quarter was 96%, with office and life science rent collection at 98%. In April, our overall collection rate is currently 95%. These continued strong rent collection levels reflect our well-capitalized technology, life science, and media tenant base. Now turning to the balance sheet. In April, we secured a $1.1 billion sustainability-linked credit facility and extended the term to 2025 with two 6-month extension options. The new credit facility reflects a 10 basis point reduction in pricing with a sustainability KPI metric that allows us to save an additional 1 basis point, assuming we hit annual targets. Under an accordion feature, we may borrow up to $1.6 billion with lender approval. The completion of this amendment further enhances our liquidity profile. We have no material debt maturities until 2023. And after accounting for the sale of the exchange, our liquidity today stands at approximately $2.6 billion, including approximately $1.5 billion of cash and full availability of the $1.1 billion under the new revolver. Our current net debt to Q1 annualized EBITDA is about 4x, but we expect this to increase over time as the cash is deployed. Given the continuing uncertainties associated with the COVID-19 pandemic as well as the various options we're evaluating in deploying proceeds from the sale of the exchange, we are not providing full year 2021 guidance at this time. However, we are providing guidance for the second quarter based on the following key assumptions. The sale of the exchange contributed approximately $0.13 of FFO per share in the first quarter. NOI margin is expected to be approximately 70%. G&A will range between $22 million to $24 million, reflecting seasonal corporate expenses in the second quarter. Cap interest is expected to be similar to the first quarter, and we expect straight-line rent to decline roughly $6 million to $9 million from the first quarter, driven by the sale of the exchange as well as continued burn-off of free rent. At our newest residential project, the Jardine, located on our Hollywood mixed-use campus, we completed the 193 residential units in mid-April, and we'll cease capitalizing interest. Lastly, we expect quarter-end occupancy to remain relatively flat to the first quarter, ranging roughly between 91.3% to 91.5%. So to summarize, our first-quarter results adjusted for $0.01 related to COVID charges would have been $0.99 per share of FFO. If we then adjust this for the impact of the sale of the exchange, slightly higher G&A, and bringing the Jardine online, we project second-quarter FFO per share to range between $0.80 to $0.86, with a midpoint of $0.83. Further, the following assumptions based on what we know today may also help you assess our earnings results for the full year. With respect to our retail portfolio, we extended the rent relief program, which included approximately 90% of our retail tenants through the end of May. This has a minor earnings impact. And from a cash perspective, 1 month of rent deferral for these tenants is approximately $1.5 million. Non-contractual parking income totals approximately $1.5 million of NOI per month. We expect to receive about 1/3 of this amount until businesses resume more normal operations. With respect to lease expirations, we have approximately 380,000 square feet of expirations remaining to be leased this year with only 2 leases that are greater than 50,000 square feet. Both expire in the third quarter, and we are making good progress on one of them. Additionally, as we have previously reported, we are in a legal dispute with AT&T, which had a contraction option on up to 150,000 square feet in 2022. We strongly believe the tenant did not validly exercise its option. We expect to commence revenue recognition for the following office and life science projects within the following time frames. At One Paseo office, we expect revenue commencement on the remaining 16,000 square foot lease by the end of the third quarter. At 333 Dexter, while we forecast the remaining 51% of the 635,000 square foot project to come online by the end of this year, revenue recognition will ultimately depend on working with the tenant to complete our TI work. At KOP Phase 1, we expect revenue commencement on the entirety of the 656,000 square foot project by the end of this year. At One Paseo residential, we have had strong leasing to date, putting us on pace to be at the high end of our original year-end occupancy range of 75% to 80%. And lastly, we anticipate remaining development spending of $300 million to $350 million, including spending to commence KOP Phase 2. Now that completes my remarks. Now we'll be happy to take your questions. Operator?

And the first question will come from Nick Yulico with Scotiabank.

I guess, just first question is on the cash that's on the balance sheet right now. I know you do have a large restricted cash balance. Does that mean that you're earmarking that towards a 1031 purchase? And if so, maybe you could just give us a feel for how that cash might be deployed for income-producing Day 1 assets versus money being set aside for future development?

Yes. This is John, Nick. As you know, we have the ability to do exchanges, and we have that ability through until the fourth quarter. In that context, we designate a pool of up to $2 billion of potential acquisitions from which to do roughly $1 billion worth of exchange. We're looking at that earnestly; I'm not going to get into specifics. We also have the ability to use a substantial portion of the cash for other purposes like development. If we go that route, then we could consider a special dividend, but we would determine if we wanted to do that in the fourth quarter. So all of that is on the table and by the next conference call, possibly by NAREIT, we'll be able to provide a better description of what direction we're going. But you can imagine that we're looking at a lot of different things right now.

Okay. That's helpful, John. So the second question is just on the increased tour activity that you did cite in some of the markets. Tenant demand sounds like it's coming back in some cases. I guess just if you or Rob would mind going through some of the markets in terms of what you are seeing from tech and other sectors, as you're thinking about space now in a post-COVID world, whether you're seeing any trends there? Any impact as well from this idea of unassigned seating and companies thinking about maybe a hybrid work model going forward, which could have some impact on number of desks, number of people in the office, and potential space impact as well.

Rob, do you want to cover that one?

Sure, Nick, how are you? Let me begin with a general highlight about the West Coast and what we're experiencing. First, job postings in 2021 are already exceeding those of 2020 across all our submarkets. Second, major tech companies are accelerating their plans to return to the office; some are moving back in May, others in June, and some in July. These return schedules will be gradual rather than sudden. These two aspects are very significant. Additionally, tour activity has recently reached levels close to or equal to those seen before the pandemic. When you combine these factors, it’s clear that they will drive demand. Adding in the hiring situation, job postings in Seattle, San Francisco, and San Diego are remarkably strong compared to previous years, including 2019, which was an exceptional year. STEM hiring in Seattle has increased by 21%. Currently, there are 57,000 job postings in the Seattle metro area, which is a remarkable figure for March 2021. In Bellevue, Amazon is particularly active, having completed three deals totaling over 2.6 million square feet. Their demand for space remains strong. Notably, for the first time in about a year to a year and a half, Seattle has seen more tours than Bellevue, which was the hottest market during the pandemic. Several late-stage VC-backed companies, such as Convoy, Remedy, and Snowflake, are looking for over 100,000 square feet in the Seattle area. We’re also observing that professional service companies are making long-term commitments as their leases come up for renewal. Overall, the outlook for Seattle is positive. While there is more sublease space available compared to 2019, we believe that the current activity will lead to absorption of this space. About 2 million square feet is under construction in the Seattle area, with 17% already leased and attracting good interest. In San Francisco, we shouldn't be overly optimistic, but the facts speak for themselves. In March 2019, there were 64,000 job postings for STEM positions. By March 2021, that number rose to 68,000, a significant increase as we recover from a challenging period. Brokers are tracking approximately 6.3 million square feet of demand in San Francisco, down from 8 to 9 million pre-COVID. Currently, there are 17 tenants seeking over 100,000 square feet, 10 of whom are looking for growth space. Additionally, more than a dozen law firms are touring spaces over 15,000 square feet, indicating a shift in the market since the pandemic began. Despite the presence of a considerable amount of sublease space, including 1.8 million added in Q1, there is activity in this segment, with specific examples like the macys.com space seeing considerable interest. There is a trend toward quality in both direct and sublease spaces, especially well-located and well-fitted options. In Los Angeles, particularly in Culver City and Hollywood, market conditions remain robust due to hiring by content producers. The Hollywood market has extremely low vacancy rates, while Burbank has also experienced growth. However, West L.A. has more sublease space available. Past experience indicates that tenants in this area tend to absorb space more slowly, but we anticipate that quality sublease options will eventually find tenants. San Diego is thriving, particularly in key submarkets like Del Mar, UTC, and downtown's Little Italy area. The intersection of tech and life science sectors creates competition for space, particularly in UTC, where the vacancy rate is currently around 2%, leading to increased demand in nearby desirable areas. In terms of life science activities, we’re seeing trends in San Diego that mirror those in the Bay Area at locations like Oyster Point. We reported 770,000 square feet of net absorption in Q1, with the vacancy rate dropping from 4% to 2%, which is impressive. Venture capital funding for life sciences in the Bay Area reached a record $5 billion in Q1. Overall, while I may have spoken quickly, the outlook across these markets is improving, even though the progression may not be linear. We will need to continue monitoring the sublease space, especially in San Francisco, but conditions are certainly better than they have been.

The next question will come from Jamie Feldman with Bank of America.

That was really helpful color on the markets. Can you talk about where you think the mark-to-market might be today? I know you guys had positive leasing spreads, but maybe if you go through the different regions, how much you think markets have moved on a net effective basis and how does that compare to your portfolio or what's rolling?

Are you going to handle that, Michelle?

Yes. I guess I don't think we have enough data points to comment on where net effective rents are today. We've provided what market rents were pre-COVID, but I don't think that's as relevant.

Okay. Jamie, this is John. If I could just add a little color to that. Obviously, I'm going to move around a little bit. In Bellevue, the rents we're doing today are the highest rents we've ever achieved in Bellevue, the highest in the market has ever achieved. We haven't done any leasing in downtown Seattle because everything is leased that we own. With regard to San Francisco, we're still seeing very strong rents for pre-pandemic quality space that we have. In Hollywood, we have some vacancy at the Columbia Square project, and the rates we're negotiating are strong rates. Culver City has been very strong. In San Diego, our rents on office space are all-time high, and our rents on life science are all-time high. Returning to South San Francisco, where we have Phase 2 of KOP about ready to start, we think the rents will be up over what we did in Phase 1, which was around $67 triple net. We think rents will be up 10% or more.

Okay. When examining the markets and occupancy percentages for the quarter, we noticed that in the CBD of San Francisco, occupancy was down, while the rest of the Bay Area was slightly up or stable, depending on the submarket. Is there a significance to this trend? I understand that the market statistics for Silicon Valley have improved as well. What observations do you have on the ground, and how do you anticipate these trends will evolve?

Jamie, are you asking about occupancy or demand? I didn't catch the first part.

My question is regarding the Bay Area statistics from the quarter. The occupancy rate in San Francisco has declined, while the rest of the Bay Area, particularly Silicon Valley, has seen a slight increase. Is this reflective of the current market conditions? I understand that you may not have a lot of data on a quarter-to-quarter basis, but could you clarify whether the southern part of the Bay Area is performing significantly better than downtown San Francisco?

I wouldn't say it's holding up much better, but Silicon Valley has not experienced the severe shutdown that San Francisco did. While everyone was shut down, San Francisco has only had about 25% of its workforce available to occupy buildings. However, Silicon Valley, particularly in well-located, transit-centric areas, has managed to weather the storm fairly well. Regarding market rates, if you examine the premium Class A product in San Francisco, we don't have much available space, but properties like 555 Mission and the Ferry Building have completed deals exceeding $100 a square foot, which are rates we saw before the pandemic. Overall, things are stable in San Francisco. Supposedly, next week, we'll enter the least-restrictive tier, which coincides with companies likely speeding up their plans to bring employees back to work.

Jamie, this is Eliott. Just to add to that, and your question on the difference between the city and the valley. For us, it's a function of our rollover and where there was rollover in the particular quarter, there really wasn't much to speak of in the valley. So I wouldn't read too much into the occupancy differences.

Okay. And when you think about all the capital that's been raised in the Bay Area and what that's going to mean for job growth and space demand? Do you think that you can parse that out by downtown versus the valley or it's too early?

A lot of it is focused on downtown right now. There are 12 active requirements from VC-backed firms. While they are relatively smaller, they show a strong commitment to the city. Additionally, two large firms conducted a study over the past six months about potentially relocating to the East Bay, but they have now decided to shelve those plans and return to San Francisco. These are two separate companies that have chosen to focus back on San Francisco. Particularly among the major tech firms in San Francisco, they have all expressed a commitment to the city and a return to work. For instance, Salesforce is planning to come back in some capacity in May, Facebook will start occupying 181 Fremont and Park Tower in June at a scaled level, and Google is doing the same. There is a lot expected to happen this summer.

The next question will come from Steve Sakwa with Evercore ISI.

I guess I want to follow up on maybe Jamie's question just on demand. But Rob, maybe the sublease space has remained high in San Francisco. And I'm curious if your expectation is for that to start to really get pulled back as tenants start to come back. And maybe to that, Salesforce has put the majority of the space at 350 Mission on the sublet market. So I'm curious if you start to expect some of that space to come off maybe in Q2 or perhaps by the summer.

Yes. Steve, good question. I think one of the things that's encouraging about what we see going on with sublease space are two things, basically opposite ends of the spectrum. Smaller tenants in the 10,000 to 20,000 square foot range are looking at sublease space, and those are generally companies that either have a lease expiration coming up or have grown modestly, but they're starting to look at sublease space in order to give them flexibility and bring people back to work. On the other end of the spectrum, there are some larger deals over 50,000 feet looking at sublease space. So that we're watching closely. Right now, there's about 535,000 feet of pending deals that will be absorption in the city. When those happen, that will be a very positive occurrence, obviously. And we still have a lot of sublease space to deal with. To your question, if we keep going at the pace we're seeing that we've been talking about San Francisco today, I think things could absorb quicker than people were thinking, but it's hard to pinpoint; the second quarter might still be a little early, but third and fourth, I think we'll definitely see some absorption of it.

Okay, great. John, I know you sort of outlined the exchange transaction and a lot of things still up in the air, whether you find an acquisition or two to 1031 into. But if you did not, making that kind of the base case, can you just maybe help us frame out what the special dividend might be and how much you'd be able to retain for the development at KOP 2?

Yes, it's approximately 50%, slightly more than what we would be able to retain. However, I don't believe it would be appropriate for you to assume that this situation is likely to occur. We will not be discussing ongoing transactions.

I understand. But 50% of the total sales price might need to be a special dividend if you couldn't find something?

Yes, roughly. Maybe a little less.

And then just lastly, Michelle, I just wanted to circle back. You made a bunch of comments, and you said something about 333 Dexter, and I know that the remaining 51%, I thought was supposed to be rent commencing in Q4. But it sounded like you were a little hesitant on that as being kind of a hard date. It sounds like maybe there's some kind of TI build-out issues. Is it sounding like that might slip a little bit into the first quarter of '22?

Yes. It's hard to tell right now. We're saying, hopefully, it should come in by the end of the year, but it's going to be driven by TI build-out that we're working with the tenant on.

The next question will come from Emmanuel Korchman with Citi.

John, I think you mentioned this in your prepared remarks about just the amount of people talking about and doing life science. A couple of questions related to that. One, given the large amount of square footage that you outlined in your own portfolio that will be that life science nature. How much of that is going to be lab versus office lease to a life science or science tenant? And the second question is when tenants are out there looking for space, how much work and/or other ways are they underwriting that who the landlord is going to be before signing a lease?

Yes. The ratio of lab and office varies, obviously, by tenant. So it's hard to predict what that will be. So I really can't give you a specific there, Manny. But we expect the buildings that we talked about are life science; all have quite a bit of lab. With regard to your second question, I'm sorry, could you repeat it for me?

Just how tenants are thinking about who the landlord or maybe the specific location in buildings are rather than saying, 'Oh, good, look, this is a life science development. They told me it's life science.' It's someone that's been office before; how much experience you really need?

Life science isn't as complicated as many believe. You need the right floor ratios, ceiling heights, and structural systems. The physical attributes of a building are crucial; you can't simply convert an 11-foot floor-to-floor space to a 15-foot space without major modifications. Some buildings aren't suited for such changes due to their design or structural ratios. We've noticed a lot of properties being marketed as potentially convertible to life science that we find unconvincing. While it may be possible to make these changes, they won't be ideal or top-tier, and that's not the type of product we want. Regarding landlords, it's vital to note that tenants in this sector tend to have long-term occupancy due to their significant investments, often spending $400 to $500 per square foot, plus additional funding for tenant improvements. This heavy investment makes them likely to stay put. Additionally, the life science community is increasingly seeking modern facilities similar to those in the tech industry, aiming to attract and retain top talent. They desire an environment with appealing amenities and aesthetics. We believe that our expertise aligns perfectly with these needs. Many of the conversion projects being discussed lack the desired atmosphere. Some properties are being marketed for life science simply because that market is thriving. We anticipate that some investors who have bought properties for "life science" may encounter challenges based on our observations of market conditions. Often, upon inspection, these properties don't meet the necessary criteria, or while some conversions might be feasible, the resulting product will likely be less appealing for tenants, leading to increased competition on pricing and overall reduced valuations. We feel we are well-positioned with our 3.6 million square feet of entitled development in prime locations where we can build modern, state-of-the-art facilities that cater to the needs of life science users.

John, it's Mike Bilerman. I know the main focus right now is identifying new investments for the cash that you've been able to raise, either new assets, new opportunities, or existing development opportunities. I want to get your perspective on how you think about your stock as a potential investment, if you're not able to identify those opportunities. Thinking about it, while you have a distribution of the gain that you need to make, you could do that distribution 90% in stock. So could you think about doing a large-scale share repurchase, Dutch tender, or something else to effectively take advantage of buying into your existing portfolio and buying more of your development sites? How does that rank in your mind? And where does that sit overall as you think about deploying your capital?

Yes, I don't want to rule anything out regarding our future direction. We have a considerable amount of time to decide if we will pursue exchanges. We've been actively exploring various opportunities in our preferred markets for a product that meets our criteria. If we proceed with 1031 exchanges, most of our focus will be on existing products, although some could involve land purchases where we see the potential for substantial value creation. We are assessing all options, and in the coming months, the company will be better positioned to answer your question and address the concerns raised by others. Please understand that we are considering everything.

It was a specific question about your stock and how attractive your discounted shares are today. You likely have a good understanding of your portfolio's value, which must seem appealing. In four or five months, the stock may not be at these levels if the developments you've mentioned occur. Therefore, you might want to consider that today could be your best option. That's what I was trying to highlight.

Yes. I just don't feel comfortable giving you a specific answer to that question. Obviously, if we go that route, we internally need to go through a process, but understand that we look at everything all the time. We'll be diligent with regard to where we allocate our capital. We pride ourselves on that, and more to come.

The next question will come from Craig Mailman with KeyBanc Capital Markets.

Just kind of curious on the exchange. Obviously, the buyer paid a pretty healthy price per pound there, and the talk is they want to kind of go life science or maybe get Dropbox out. I guess just kind of curious what you think if someone went that route, how much more they would have to spend per foot to kind of get to an all-in basis on that building? What that kind of tells you about the value creation that you guys have within the 3.5 million square foot entitled life science pipeline that you have?

When we consider selling an asset, we evaluate not just the selling price and its attractiveness, but also how we could use the proceeds to create shareholder value. Regarding the property's conversion, I’ll share some rough estimates that could vary by 10% or 20%. The property has tenant improvements that would partly remain, while some would not, and it already has the necessary infrastructure for life sciences. You might need to spend around $100 per square foot, or potentially more, on tenant improvements, which would lead to downtime and the need to relocate tenants. This means you’d potentially face a year of construction without rental income, and there might be costs for a buyout but we chose not to take that path since we sold it instead. While I can't provide exact costs, one should consider expenses related to vacancy, lack of returns during construction, tenant improvement costs, and soft costs, plus various lease terms like free rent or phased move-ins. We believed the sale was a favorable transaction for us. We expressed when we announced the sale that we found the asset valued at $1,440 per foot to be more beneficial and certain than any future potential redevelopment. Others may see it differently, which is a natural aspect of business.

That's helpful. But needless to say, relative to the basis, you guys are paying at KOP, it feels like life science assets, you're going to create a significant amount of value.

Yes. I mean if you think about KOP, the first phase, 650,000 feet was roughly, I think, around $900 a foot. Is that right, Michelle?

Yes, that's right.

The second phase is roughly $1,000 a foot. There are various things with regard to the different sites and so forth that contribute to that. Obviously, some cost escalation, but the rents have escalated nicely. You take a look at what one of our competitors bought properties that recently or in the last 12 months on the other side of the 101, which is a location that's fine. It's not nearly as quality location, in our opinion, as KOP. We're sort of main and main. I think they paid, what was it, $1,350, $1,400 a foot. That was on rents that were lower than the rents we achieved, as I recall, in our first phase, and we're thinking we're going to achieve higher rents, pretty significantly higher rents in Phase 2. So if you apply a cap rate to top-tier life science, which would be dearer or lower than office and you look at the rents and whatnot, I think we can create a massive amount of value through the product that we will be developing over the next couple of years. So you're right.

I know I've asked this question before, and you mentioned looking beyond your core markets, possibly into life sciences. Is there any update on that today? Are you making progress with this capital infusion, or are you still in the due diligence phase?

I'm confident that we will be able to provide a much clearer update in a couple of months.

Okay, fair enough. And then just one last one for Michelle. You had mentioned AT&T and DIRECTV. Is there anything that you guys are reserving or anything on the balance sheet for that? Or kind of how does that play itself out from an earnings perspective?

No. We are not including any reserves in our second-quarter guidance. As we said, we're in a legal dispute. So we'll know more, but nothing at this time.

The next question will come from Derek Johnston with Deutsche Bank.

Most of my questions were answered. So forgive me for getting a bit creative. Are you concerned that the work-from-home and hybrid model begin a snowball effect? Start to become viewed as a way for companies to address the S in their ESG programs, and that would be by offering a greater work-life balance and possibly the need for less office space now. I'm not smart enough to come up with this, but I've heard it tossed around. Do you mind weighing in?

You're asking an interesting question, but I don't think that's how things will unfold. From what we're hearing, people are really tired of working from home. They want to return to the workplace and are eager for schools that haven't reopened to do so, allowing their children to get back to school for both education and social development. They also want to resume a productive life rather than just being confined to their homes. Will there be some remote work options on the side? Absolutely. There has always been a work-from-home segment, particularly among freelancers. Companies will definitely offer some remote work opportunities. However, I believe that's a nice topic for casual conversation over drinks or coffee, with no offense intended.

No, I understand. There's just not a lot more left.

It's not overhearing.

How about the 1031 exchange elimination, that continues to come up more frequently? I mean, how do you feel about the potential elimination? Do you think it has any legs or merit to it? And do you think the administration understands the CRE implications? What do you think about that, John?

Yes. Well, it is a concern. Any time these crackpot parties put up things like that, it can have an implication. We're members of the Real Estate Roundtable. Obviously, we're members of NAREIT and other trade groups, BOMA, et cetera; they're all working to defeat the concept of the 1031 elimination. I think it would be harmful. I'll tell you what I think happens. I think we're a reasonably sized company as are most REITs. I think what the elimination of 1031 will do was just consolidate more power in the bigger companies, all at the expense of the families and smaller operators, and I think it would be a travesty. I think it would be an advantage to the big companies, but it will be terribly harmful to smaller operators. I think it's just bad policy. In terms of rating or whatever, it's too early to tell. We've obviously seen a lot of stupid ideas come out of the administration as well as amongst the states. It just gives me more, as everybody knows that's on this call, and certainly speaks, I have no use for most people in government, like 0, and this just further causes me to feel that way because the policy implications that are being discussed here are, in my mind, insane.

The next question will come from Dave Rodgers with Baird.

John, just a couple of follow-ups for me. One was obviously, 9455 was not a lab deal down in San Diego. So curious on comments around Kettner and the demand and progress that you might be making there. And then I think the second question, you had talked about in the last couple of quarters doing asset sales, clearly achieved a big one this quarter. I guess notwithstanding reinvesting those proceeds, what's your continued view on monetizing assets here if you're able to reinvest those proceeds, does that continue this year? Does that get pushed out?

Yes, there may be something that comes up this year, but I don’t believe anything significant will happen at this point. We are continuously fine-tuning the portfolio. You mentioned that 9455 wasn't in the life science sector. We had a major life science company and a larger tech company, and the tech company came out on top. That's likely a positive development since we've achieved a lot with that company and are expected to continue collaborating with them. Regarding Kettner's progress, leasing a building is challenging without being able to conduct tours, and in 2020, we had very few opportunities for that. It was difficult to even get our broker to visit the site due to the serious nature of COVID, which we still take seriously today. However, we're now seeing an increase in tours and interest from various users, including larger companies interested in the entire space. I eagerly anticipate the chance for everyone on this call to visit and see our work in San Diego. Eliott and I are currently at our San Diego office, located at One Paseo. I believe One Paseo measures up against any project in the country or the world; it’s truly remarkable and everyone who has seen it agrees. The leasing performance, both in retail and office spaces, has been outstanding. We are achieving record rents in residential, retail, and office sectors in San Diego's history by a significant margin. As for 2100 Kettner, the building's shell is expected to be completed around mid-year. I encourage all of you to check it out and share your thoughts. I’m confident that it will achieve very high rental rates and result in substantial value creation relative to our investment, despite its relatively small size of a couple of hundred thousand square feet.

It's a $140 million project.

And how many million, roughly?

It's a $140 million project.

I can't recall all the figures right now, but I believe we are likely to see another opportunity for value creation. I'm not suggesting that we plan to sell, but we are very interested in the developments occurring in San Diego. As Eliott, Rob, and I mentioned earlier in our discussion regarding life sciences, there is a noticeable shift of life science companies into Carmel Valley. They've always had a presence there, also known as Del Mar, where One Paseo and other properties are located at the intersection of the 56 and the 5. We are experiencing a strong influx of life science businesses in this area. They are expanding towards the 56. I anticipate that property values in UTC, Torrey Pines, and Del Mar, extending up to the 56, will significantly increase in the coming years. I predict that we will start to see rents in these markets approach the pre-pandemic levels of San Francisco in the near future.

The next question will come from Frank Lee with BMO.

Can you provide an update on the tenant demand in terms of square footage you're seeing at KOP Phase 2? And also, the city still owns several hundred thousand of development rights there. Just wondering what is the likelihood and if there's even an opportunity to acquire additional square footage from them?

I got the KOP Phase 2 square footage demand. What was the second part of your question?

I'm just wondering if the city still owns several hundred thousand of development rights. Just curious to see if there's even an opportunity to acquire the square footage from them.

Yes. I'm not going to comment on that. But with regard to KOP Phase 2, Rob, do you want to take that? I don't know sort of the exact square footage, but I know it's several multiples of the size of the project.

Phase 2 encompasses approximately 900,000 square feet across three buildings. We've indicated in our previous Q4 call that there's more interest in space than we are currently releasing, which is encouraging for us. I'm being a bit careful not to share too much since this is a public forum, but we are very pleased with the level of interest we are seeing. Looking at this project, similar to what John mentioned about One Paseo, the life science campus by the Bay is remarkable. There is a significant difference between having over 30 acres next to San Francisco Bay for a life science campus compared to other life science facilities around the market, like Sierra Point or other areas in South San Francisco that are closer to industrial zones. Those projects might face greater challenges in leasing because life science companies are also focused on attracting talent, much like tech companies do. The skilled biologists, scientists, and similar professionals are in high demand. These companies are replicating what the tech sector has done, which is to create an environment that draws in and keeps talent. We are contributing to this by developing the type of layout and campus they need. I hope that addresses your question.

Yes, it definitely does. And then last one for me. Just want to touch on the acquisition opportunities you're evaluating with the exchange sale proceeds. What is the appetite for value-add opportunities versus more core Class A?

This is John. We're exploring a variety of opportunities that are mainly core but also offer leasing potential, which we believe will increase rental values significantly. We see traditional value-add opportunities as well as some ground-up development. Our approach will be a mix; we don't intend to simply acquire an asset with a low cap rate and hold it. We focus on adding value or creating value and take pride in that. There are numerous ways to achieve this. You can acquire a core asset at a low cap rate that is poised for rental growth. You can implement physical improvements or expand properties. All the kinds of strategies that we have historically employed are currently on the table. Regarding the demand for life sciences in the Bay Area, there is approximately 4.2 million square feet of demand in San Francisco's life science sector, predominantly in South San Francisco, where the vacancy rate is below 2%. Understandably, we are in discussions with many stakeholders.

The next question will come from Omotayo Okusanya with Mizuho.

This one is kind of more for Michelle. Michelle, I'm just trying to understand 2Q guidance a little bit better. I mean 1Q you're at $0.98. You add back the $0.01 charge at $0.99. You take out $0.13 for exchange, you're at $0.86, you have higher G&A by $0.01, you're at $0.85, but the guidance range is $0.80 to $0.86. So I'm trying to understand the range as kind of what gets you to that low end of $0.80 versus you potentially moving higher from kind of like the $0.85 starting point.

Yes. So on the walk to the midpoint, starting with the first quarter, we said we're at $0.98 plus you add back the $0.01 for the COVID charge. So you're at $0.99, less the impact of the exchange, which we said is $0.13, less the remaining of about $0.03 for both G&A as well as the lease-up of Jardine gets you to $0.16, getting you to the midpoint. With respect to the range that we provided of $0.80 to $0.86, we just think there's still a lot of uncertainty in the marketplace right now as our markets are starting to open up again. So we wanted to give ourselves flexibility.

And this is Tyler. Just on the difficulty of providing guidance in this market, I think this is an example of that. I mean you've got seasonality. You've got uncertainty in the markets. For us, the three drivers that Michelle just went through, which were the exchange, G&A, and Jardine, those are all temporary adjustments to our FFO. Theoretically, over time, we're going to be picking all that back up. It's just another example of why guidance is difficult right now.

This concludes our question-and-answer session. I would like to turn the conference back over to Michelle Ngo for any closing remarks. Please go ahead.

Thank you for joining us today. We appreciate your continuing interest in KRC. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.